• Powell explained why prolonged low inflation was bad for the economy
  • The Fed will slightly alter how it views unemployment versus inflation
  • Powell highlighted the benefits of a strong labor market, particularly for many in low income communities

Among the policy shifts that Federal Reserve Chairman Jerome Powell discussed in his speech Thursday morning was how the central bank will focus more on lower-income segments of the country when setting new monetary policies.

In connection with this new focus, the Fed will slightly alter how it views unemployment versus inflation.

Powell noted in his remarks that in the past the Fed worried that falling unemployment levels would lead to rising inflation – but, going forward, the central bank will not consider that as a negative effect. Presumably, this would expand the Fed’s definition of “full employment” – meaning a condition where almost no one is jobless, especially lower-income and deprived communities. (However, the definition of ‘full employment’ has varied over the years)

“With regard to the employment side of our mandate, our revised statement emphasizes that maximum employment is a broad-based and inclusive goal,” Powell said during the virtual symposium. “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”

Inflation has been low for much of the past decade – below the Fed’s 2% target.

Powell explained why prolonged low inflation is bad for the economy – a counter-intuitive concept for many people, he conceded.

“After all, low and stable inflation is essential for a well-functioning economy,” he said. “And we are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes. However, inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectation.”

Powell specifically cited in his speech how the Fed has started discussing matters with lower-income communities and other groups, through its “Fed Listens” initiative.

“The stories we heard at ‘Fed Listens’ events became a potent vehicle for us to connect with the people and communities that our policies are intended to benefit,” he stated. “One of the clear messages we heard was that the strong labor market that prevailed before the pandemic was generating employment opportunities for many Americans who in the past had not found jobs readily available. A clear takeaway from these events was the importance of achieving and sustaining a strong job market, particularly for people from low- and moderate-income communities.”

Diane Swonk, chief economist at Grant Thornton, noted how explicitly Powell referred to lower-income Americans during his speech.

“There’s a clear goal for the Fed to be more inclusive,” she said, CNBC reported. “[But] the idea of not only overshooting inflation to engage those on the sidelines and get more inclusive and broad-based and inclusive employment, that’s something I’ve never seen. They know what their limits are as well. That’s important...They are doing absolutely everything they can do to step up their game on this.”

Dallas Fed President Robert Kaplan told CNBC: “We were able to pull in a whole range of underemployed groups [into discussions], lower-income groups, Blacks, Hispanics, women with high school educations or less.”

Kaplan added: “It highlights the importance of getting underrepresented groups into the workforce and the long-term benefits that can have on income inequality, wealth inequality and having a stronger economy with a stronger labor force.”

Swonk also said the Fed was concerned that in the last recession many unemployed workers could not find jobs until late in the economic expansion.

“It was important to explain this, to get more public about this,” she said. “It explains their goal of making the fruits of the expansion fill more bellies. The problem is, and Powell underscored that you don’t get to harvest those fruits until late in the expansion. He was implicit about saying we can’t do this without help from other things supporting this. It’s a full government, societal effort.”

C.J. MacDonald, client portfolio manager at GuideStone Capital Management in Dallas, told International Business Times that the Fed no longer fears a very low unemployment rate.

“They previously set a floor for the lowest unemployment rate for a healthy economy,” he said. “However, due to long-term changes in the employment market, they will let the rate fall as low as possible. They will only seek to affect the labor market if unemployment rises.”

Greg McBride, chief financial analyst for Bankrate, commented that Powell has now explicitly defined the “maximum employment goal as being both broad-based and inclusive, acknowledging how economic prosperity has often failed to reach all segments of society and being cognizant of that when setting policy in the future.”